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Empirical Search Strategies Seeks Downside Protection Option at Avigen, Inc.
Date:3/20/2009

CHICAGO, March 20 /PRNewswire/ -- Empirical Search Strategies, LP. ("ESS"), the beneficial owner of approximately 2.3% of the Avigen, Inc.'s (Nasdaq: AVGN) outstanding common stock, has proclaimed their support for a "downside protection" measure described by the Biotechnology Value Fund ("BVF"). ESS believes a clearly articulated downside protection measure is beneficial to all shareholders for the following reasons:

  • First, offering downside protection guarantees shareholders an opportunity for liquidity. Without a liquidity option, shareholders who decide to exit their Avigen position for individual reasons (or those who view the final transaction unfavorably) will be forced to sell shares into an extremely illiquid market environment. It is not uncommon to see a 5% bid/ask spread in Avigen stock on any given day.

  • Second, there is currently excess cash on the balance sheet of approximately $35mm (which includes a healthy, but unwelcome burn rate of approximately $10mm and an estimate of required capital/miscellaneous costs of roughly $2mm throughout 2009). This excess cash is not needed to sustain the sale of AV411 or to pursue the Genzyme partnership. To ensure agency costs are limited, management should publically state they will either (i) distribute this excess cash immediately, or (ii) structure a deal similar to the MediciNova deal that offers shareholders an exit option for a specific amount and at a specific time in the future.

  • Third, Avigen is not a bank. Management should focus on selling their value-proposition: experience and know-how in the AV411 program, and continuity and understanding of how to maximize value from the Genzyme partnership. It may seem sensible to bargain for a "good deal" from an acquirer who is in financial distress by offering them a pile of cash. However, if a potential buyer is strapped for cash in this environment, it's probably not a company Avigen shareholders want to own--even if they offer a slight premium. As a matter of fact, the very thought of owning a distressed company is the main reason ESS values a downside protection measure that is clear and transparent from the beginning.

In conclusion, ESS believes it is not impossible that in a year from now Avigen shareholders will find themselves experiencing a bout of deja vu. We worry that we will be holding a biotech company that is burning cash, selling at .5x liquidation value, and paying management salaries of $500,000 to $1,000,000 a year during the worst economic environment since the Great Depression. In the end, ESS believes the following statement from Avigen (or anything even resembling this statement) would maximize the utility of all Avigen shareholders, and cause BVF to IMMEDIATELY drop their proxy fight, which will save shareholders the fees associated with the proxy battle:

"Dear Avigen Shareholders:

Regardless of the deal we choose to pursue, we will guarantee a downside protection option for all shareholders. Specifically, we will offer all shareholders the opportunity to exchange their shares for $1.10, six months following the closing of a deal. If shareholders find that the NewCo is simply burning cash and providing no value, they will have a 30 day window to exchange their shares for $1.10 per share. If shareholders believe the NewCo is worth more than $1.10, they can maintain their ownership in NewCo and participate in the future of the company.

We believe this arrangement will provide downside protection to shareholders who are risk-averse in the current economic environment, and at the same time, this deal will offer NewCo management an opportunity to prove their worth and earn shareholder trust.

Sincerely,

Avigen Management"

Wesley R. Gray, ESS Portfolio Manager, stated, "I really appreciate the steps management has taken to maximize shareholder value and I value their hard work. I just wish they would listen to shareholder requests more diligently. For the vast majority of shareholders I have spoken to, downside protection and a decent chance for reasonable upside beats the outright ownership of a distressed biotech company--especially in this investment environment."


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SOURCE Empirical Search Strategies, L.P.
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